The Fed’s Currency Swap Covert Bailout of the Eurozone

On Tuesday, March 26, 2012, I was invited by Ron Paul and his staff to assist a meeting of the Domestic Monetary Policy and Technology Subcommittee of the House Committee on Financial Services. The title of the hearing was “Federal Reserve Aid to the Eurozone: Its Impact on the U.S. and the Dollar.”

Unfortunately, Ben Bernanke had not come to the hearing, being busy with propaganda lectures in favor of the Fed. Instead, two of his colleagues, Mr. William C. Dudley (president and chief executive officer, Federal Reserve Bank of New York) and Dr. Steven B. Kamin (director, Division of International Finance, Board of Governors of the Federal Reserve System), showed up to answer the committee’s questions on currency swaps with other central banks.

The hearing dealt mainly with the Fed’s currency swap with the ECB, which amounts to a covert bailout of European banks.

But why did European banks need help from the Fed in the first place? European banks had borrowed dollars short term in international wholesale markets and lent these dollars for the long term to US companies or households. The maturity mismatch is highly risky, because once a bank cannot renew its short-term debts it becomes illiquid.